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Trump and Powell are Warring Again -- (Another) Explainer to What’s Going On With Interest Rates

Say Contributor

There’s just a lot going on with the recent spat between President Donald and Federal Reserve Chairman Jerome Powell. But here’s what you really need to know. Keeping Your Interest Okay, let’s start with the interest rate. We’ve been over this before, but here’s a quick refresher. Interest rates refer to the interest on a loan. The lower the rate, the easier it is for a person to get a loan, which they can use to start a business or buy a car, which increases consumer spending. But the Federal reserve is always a bit hesitant about cutting interest rates too much, because if spending grows too quickly, so can inflation, and the overall value of the dollar drops. So it’s all about finding the sweet spot. Boosting If the economy looks like it is going to slow down, an interest rate cut is a nice B-12 shot that can perk it up. This is what the Fed did in 2008 after the financial crisis. But it’s worth pointing out that while no one is happy about a recession, they are are a natural part of the economic cycle, and as inevitable as getting caught in a bad rain storm. So an interest rate cut isn’t some magical way to prevent a recession (would that it were). But, it can, potentially, make a recession a bit easier, as not all downturns are the same. Recession In Session? So, are we gonna have a recession? Dunno. But there are a lot of signs that have economists worried, chief among them China’s ongoing economic slowdown, which (to put it briefly) is caused by the country’s aging population not replacing the workforce fast enough, which is starting to pull down the rest of the world’s economy. This was enough to get the Fed to do their first interest rate cut in more than a decade: 2.0% from 2.25%, or about 25 points. But the issue is that Trump didn’t back off from his tariffs tiff with China, which is starting to pinch the economy by raising the cost of goods, especially agriculture in the Midwest. There’s also the matter of the bond yield curve looking wacky. It’s a complex subject, but when the bonds with more immediate returns are seen as a safer bet than ones you hold on to for a while, which they are at the moment, than means analysts see a drop on the horizon. A recession has followed the last 5 yield curve inversions. Food Fight So that’s the background for the Trump vs the Fed spat. While Trump is generally unpopular with the American population, his committed supporters are willing to overlook...a lot as long as the economy remains strong. While an economic downturn isn’t a guarantee that Trump would lose in 2020, voters do tend to blame the party in charge. (See, George Bush and the sluggish economic recovery of the early ‘90s.) And while Trump is very publicly saying the economy is great, nothing to see here, he likely knows what a recession could mean for him, and analysts think he’s a bit spooked. This might be why he is calling on Powell to cut the interest rates even further, by 100 points, down to 1.25 percent. But while Powell was appointed to the position by Trump, the Fed is an independent entity that doesn’t answer to the President. So, Trump is mad that he can’t force the Fed to bail him out, and thus called Powell out for his “lack of vision.” Why a healthy economy needs an interest rate cut isn’t something Trump explained. Powell seems open to further cuts, thought analysts think Trump’s requested deep cut is unwise, as it would give the Fed no further wiggle room if a recession happened anyway. No Magic Bullet. Trump is set to place another 10 percent tariff on $300 billion of Chinese goods in September. Speaking at an annual monetary policy conference, Powell said there is only so much the Fed can do, because interest rate cuts can boost demand, but if Trump’s tariff war continues to raise prices on domestic goods, then “Trade policy uncertainty” will continue to create damage that the Fed can’t fix. -Michael Tedder Photo: Sarah Silbiger / REUTERS